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Hedge Funds Love Pacific Gas and Electric

- By Rupert Hargreaves

Hedge funds have a reputation for clustering in the stocks they like most, and today, there is one stock that hedge funds appear to love more than most.

The company in question is Pacific Gas and Electric (PCG), the troubled Californian utility supplier that announced it was entering Chapter 11 bankruptcy earlier this year. The company's management decided to take this course of action following a stream of legal claims against it following its role in last year's wildfires, which were some of the most disastrous in the state of California's history.


Estimates vary, but Wall Street analysts estimate that PG&E, the state's largest utility, could be liable for an estimated $30 billion in damages from fires in 2017 and 2018.

This isn't the first time the company has been through bankruptcy proceedings. It is the second time in two decades PG&E has been declared bankrupt, and it looks as if hedge funds are orbiting on a favorable outcome for its stakeholders this time around as well.

Betting on a recovery

Some of the biggest names in the industry hold positions in the stock, its debt and claims against the business.

According to first quarter 2019 13F filings, which detail the stock holdings of any fund with more than $100 million of assets under management, David Abrams (Trades, Portfolio), David Tepper (Trades, Portfolio) and Seth Klarman (Trades, Portfolio) each owns around 25 million shares in the utility. With 565 million shares in issue, this implies that these three fund managers own approximately 13% of the $10.4 billion business alone. But these are not the only managers that own a stake. Figures suggest that hedge funds own nearly half of the publicly available shares of PG&E.

But there is more to the scenario than equity holdings. Indeed, 13Fs detail only equity investments and do not include investments in publicly traded debt as well as other assets. For this reason, we do not have complete data on who owns what in the capital structure of PG&E, but news reports suggest that hedge funds hold a significant amount of debt and other claims against the business as well. According to its monthly investor tear sheet, Dan Loeb's Third Point has taken a sizeable credit stake in the Californian power giant, making it the fifth-largest position in the $17 billion fund.

The $21 billion fund powerhouse Blue Mountain also owns a significant stake in PG&E's debt as well as the utility provider's shares. Blue Mountain has been pushing to try and get some of its directors nominated to PG&E's board of directors, after accusing management of needlessly pressing the group into bankruptcy.

Senior claims

Klarman has taken a different approach. In addition to accumulating a near $500 million position in PG&E equity, the value-focused hedge fund also owns approximately $1 billion of insurance claims against the utility supplier, giving it the right to recover losses incurred from the deadly wildfires in 2017, according to a report from Bloomberg.

Baupost is reportedly quite active in the secondary market for trading insurance claims, so this could be a different trade altogether or part of Klarman's investment in a business, a hedge against losses on the equity. If the company collapses, insurance claims are senior to the equity. If it makes a recovery, the claims will be paid, and Baupost will profit from the recovering stock price.

Hedge funds' interest in PG&E seems to suggest that these investors believe that the utility provider will recover from its bankruptcy in the near future. And with several hedge funds grouping together to try and instigate a favorable result for equity and debt holders, it is difficult to argue that the outcome will not be desirable for investors. Certainly, something to keep an eye on in the upcoming months of years as PG&E works through its bankruptcy process.

Disclosure: The author owns no share mentioned.

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This article first appeared on GuruFocus.